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Three articles on China and its efforts to be a superpower.
Not two countries, but one: Chimerica By Niall Ferguson 04/03/2007

2.China's Path to Power By Scott Cooper 2007 03 04

3.China's rise leaves West wondering By Carrie Gracie 2006.08.16

Not two countries, but one: Chimerica

By Niall Ferguson 04/03/2007

Chaos theory proposes that, by merely flapping its wings in the Amazonian jungle, a single butterfly can cause a hurricane in the Home Counties. That is because of the extraordinary complexity of the global climatic system: one tiny bit of turbulence in darkest Brazil can, under the right circumstances, trigger a kind of meteorological chain reaction, the ultimate effect of which is out of all proportion to the initial cause.

The scientists have a great phrase for this: "stochastic behaviour in a deterministic system". What it means is that every particle in the earth's atmosphere is linked in a chain of cause and effect so intricate that it is extremely hard to make accurate predictions about the behaviour of the system as whole. The weather forecast for tomorrow may be reasonably accurate. But the weather forecast for next week will be much less so. And every now and then an apparently random whirlwind will catch even the weatherman out, as happened in the "hurricane" of 1987.

Something similar can be said of financial markets, as we saw last week. The butterfly in this case was the fledgling Shanghai stock market - a mere winged bug by comparison with New York or London. But when Chinese investors flapped on Tuesday, driving down the Shanghai composite index by nearly 9 per cent, the result was a storm, if not quite a 1987-style hurricane, in nearly all of the world's stock markets.

As the world revolved last Tuesday, the value of publicly quoted companies tanked in one market after another. European stock markets went down nearly 3 per cent. In New York, the Standard and Poor's 500 dropped nearly 3.5 per cent. So-called emerging markets like Argentina, Brazil and Mexico were hit even harder. No fewer than 45 of the world's 53 major stock markets ended the month below where they had started.

By the end of the week, however, sceptical commentators were questioning the chaos theory version of events. How could a stock exchange with a market capitalisation barely 5 per cent the size of New York's possibly be responsible for such international turmoil? There had to be some other reason. Maybe recent losses in the American "sub-prime" (high risk) mortgage market? Maybe the former chairman of the Federal Reserve, Alan Greenspan, using the word "recession" in an interview? Maybe just new evidence of slowing growth in the United States?

To be sure, there was nothing entirely new about Tuesday's Shanghai "correction". The market, which out-performed nearly every other in the world last year, has been like a rollercoaster for weeks. And no wonder. Chinese investors have been flocking to their new equity markets the way Irishmen flock to bookies on Derby Day. The Chinese government itself quite explicitly warned against irrational exuberance more than a week ago. Indeed, this was virtually a planned crash.

Yet the fact remains that China's sell-off was the real catalyst, not an American event. Blaming Greenspan is just absurd. Guys, please: he retired as Fed Chairman over a year ago.

Actually, you don't need chaos theory to explain this; economics does the job pretty well. For what we witnessed last week was a symptom of a deeper structural shift in the balance of global economic power. Ask yourself why last year was such a remarkable year in financial markets; why nearly every stock market ended the year at a record high; why emerging market bond yields ended the year at record lows; why volatility all but vanished from the system; why there seemed no limit to the money to be made by investment banks, hedge funds and private equity groups.

Some analysts say it was excessive liquidity. Others talk of a shortage of assets. But the most compelling answer is the seismic impact of China's entry into the global economy. It has been the effect of China's vast, cheap labour force on global wage levels that has driven up US corporate profits from around 7 per cent of gross domestic product in 2001 to 12 per cent last year. At the same time, it has been the flood of Chinese savings into the global capital market that has driven down global long-term real interest rates from around 5 per cent seven years ago to 2.8 per cent last year.

Just think about it. Corporate profits growing to the sky. Real interest rates way below their long-run average. Anyone with any appetite for serious money knows what to do. Borrow as much as you possibly can and buy the highest-earning companies.

Of course, many economists fret about the global imbalances associated with China's rise. On one side, they point to an explosion of Chinese exports that last year generated a current account surplus of more than $230 billion; on the other, a yawning American trade deficit equivalent to more than 6 per cent of US GDP. They see China's central bank sitting on dollar-denominated currency reserves in excess of $1 trillion. They see the United States slipping ever deeper into debt to what remains, after all, a Communist regime. Recalling the upheavals caused by much smaller imbalances in the 1970s and 1980s, these Cassandras prophesy the collapse of the dollar, the annihilation of hedge funds who have borrowed in yen, and sundry other horrors.

Yet there's another way to see these supposed imbalances: as no more worrying than the doubtless very large imbalances between, say, California and Arizona. Think of the United States and the People's Republic not as two countries, but as one: Chimerica. It's quite a place: just 13 per cent of the world's land surface, but a quarter of its population and fully a third of its economic output. What's more, Chimerica has accounted for around 60 per cent of global growth in the past five years.

Their relationship isn't necessarily unbalanced; more like symbiotic. East Chimericans are savers; West Chimericans are spenders. East Chimericans do manufactures; West Chimericans do services. East Chimericans export; West Chimericans import. East Chimericans pile up reserves; West Chimericans obligingly run deficits, producing the dollar-denominated bonds that the East Chimericans crave. As in all good marriages, the differences between the two halves of Chimerica are complementary.

But isn't it kind of crazy for the Chinese to be lending money to Americans, who are on average roughly 25 times richer? Shouldn't it be the poor country that borrows from the rich to finance its industrialisation? Not any more. By piling up its holdings of dollar bonds, the People's Bank of China is not merely financing American profligacy. It is systematically slowing the appreciation of the Chinese currency, and hence keeping Chinese exports cheap and irresistible. At the same time, the PBOC is creating the ultimate stabilisation fund. When you have a trillion dollars in the locker, you are more or less immune to the kind of currency crises that caused mayhem in other Asian economies in 1997-98.

And that is one of many reasons why last week's stock market volatility represented a "correction", not a crash, much less the beginning of a protracted bear market. Of course, financial disasters can happen. There were eight months in the past century when the US stock market declined by 20 per cent or more, which helps put February 2007 into perspective. Sometimes (as in September 1931), the cause was economic policy: monetary mistakes and rampant protectionism. Sometimes (as in August 1914 and May 1940), the cause was geopolitical crisis.

But, much as American legislators like to huff and puff about China's cheap exports, they are surely not so deranged as to want to repeat the mistakes of the Great Depression. And, dangerous though the world can seem when you read the international news pages, we are very far from another world war. Indeed, paradoxically, the more dangerous the Middle East becomes, the more resilient Chimerica looks, because geopolitical risk encourages Asian investors to pile into the safe haven that is the United States.

No doubt there will be many more ups and downs as Chinese investors learn the hard way that "past performance is no guarantee of future results". But their periodic flaps are unlikely to cause more than short-lived bouts of global financial volatility - mere rain showers compared with the secular summer of Sino-American symbiosis. Chimerica, despite its name, is no chimera.


China's Path to Power
By Scott Cooper 2007 03 04

China’s further prosperity depends fundamentally on the quality of its external environment. As such, in the near term China will not force an issue – or confront the US – unless it is of critical importance, so as to maintain this external environment. The core issues of concern for future Chinese foreign and defence policy are in priority order: energy security and trade; Taiwanese independence; North Korea; missile defence and nuclear proliferation; and the South China Sea.

Given this, how can we divine China’s future foreign and defence policies? There is a danger in the use of historical analogy, yet we can look to the past as we seek to understand why a country may pursue a certain course of action. The central thesis of this paper is that the foreign and defence policies of the modern Chinese state can be likened to those of Chu Ti, the Yung-lo Emperor of the Ming Dynasty (reign 1403 - 24), and that an analysis of the underlying fundamentals provide us with an insight into the likely, or possible future foreign and defence policies of China. China’s foreign and defence policies during these periods have been governed by a reluctance to employ its military capability and intent to develop and maintain constructive yet pragmatic relations with regional and global actors. The trends and constants in foreign and defence policy, taken from these periods, are in priority: maintenance of the state; the possession of significant political, economic, soft and hard (military) power (Comprehensive National Power, CNP) to be able to shape the region as China sees fit and to be able to act without undue constraints to her core issues and concerns (geostrategic manoeuvrability); to display technological genius (including in the form of impressive military capabilities); and as a sum of all this, to be acknowledged as a great power.

Many China Watchers highlight China’s growing capabilities and perceived unknown intent as a “red flag”. Capability has long been seen as at the core of a country’s foreign policy. Great powers, it is said, tend to behave more aggressively as they could afford to do so with their great capabilities. Compared to capability, intent is perhaps more important for understanding foreign policy. The United States, for example, could have been a ‘superpower’ at the end of the First World War, but chose not to. The US had the capability, but not the intent to use it.

China today has a rapidly developing capability and has recently placed a greater emphasis on the development of the Navy, Air Force and the Second Artillery Force (SAF) which is responsible for, amongst other things, carrying out precision strikes with conventional missiles. China sees deterrence and counter-attacks through conventional weapons, including the hundreds of short range ballistic missile, as her preferred defence strategy. The Chinese military capability of both periods has been characterised by this possession of a force capable of deterrence.

The possession of certain capabilities are more easily understood than others. There is a significant level of international prestige and status that comes from the possession of certain military capabilities, such as aircraft carriers, ballistic missiles and of course nuclear weapons. So a country may introduce an advanced weapon system not because it needs it for power projection per se, but as a means of gaining prestige and increasing one’s CNP. Despite its importance, China is highly unlikely to invade Taiwan unless it declares independence. Aircraft carriers for example are not needed for an invasion of Taiwan, but would be required for power projection beyond the South China Sea and the ‘first island chain’, into the central Pacific and the Indian Ocean. Which raises the question, “What will the former Soviet aircraft carrier Varyag be used for”?

Given what we know of China’s core issues, and trends and constants in her foreign and defence policies, we can determine that there are “3 Laws of China’s Grand Strategy”:

• The most important task for the government is to maintain the integrity of the state, and improve China’s CNP;

• Taiwan is an inalienable part of China and no effort will be spared in achieving this goal, except where this would contravene the first law; and

• China has no designs beyond its borders and will not attack other countries, except as required in defence of the first and second laws.

So what does this mean for the future? We can expect China to remain economically aggressive but not militarily so, not too dissimilar to the US in the 1920’s. China will be careful to not antagonise or provoke the US, because China knows she is not yet powerful enough to take on the US, but at the same time understands that she can not appear submissive. We can expect to see the continued development of China’s CNP (to provide geostrategic manoeuvrability), concurrent with a concerted effort to continue the “peaceful development” without alarming neighbours. This will require a coordinated strategic ‘Shaping and Influencing’ campaign, that is the steady promotion of its position through the use of ‘soft power’ to shape the region and influence decision makers.

Should China acquire aircraft carriers and/or strategic bombers, it may indicate that China does indeed have other motives. It could also indicate that China fears externally created incidents may be addressed primarily, or indeed solely, through military force. Such incidents could include energy strangulation, or a Taiwanese or US initiated crisis. More likely is the possibility that a number of individual actions could combine to create a significant event. Such a confluence of factors could occur in 2008.

The boldest move that could bring the greatest gain would be Korean unification on Chinese terms. The heavy US investment in missile defence is due to North Korea’s long range missile programme and the potential to weaponise them with nuclear warheads. An effective and operational missile defence system would severely restrict the effectiveness of China’s short range missile systems. A unified Korea would provide a prosperous and dynamic trading partner on China’s border with no foreign troops stationed there. Most importantly, China would have removed the rationale for Japan’s missile defence programme, and a potential Japanese nuclear weapons program.

This Abstract is taken from a paper submitted in partial fulfilment of a Master of Arts (International Relations) degree at Deakin University, Geelong, Australia. The views expressed in this paper are the Author’s own.

About the author: Scott Cooper spent 10 years in the Australian Defence Force, in both Armoured and Intelligence Corps, and a further nine years as a civilian within the Australian Department of Defence. In the civilian field he has worked in a number of areas including capability guidance, net assessments and strategic policy development. He is currently on leave of absence from the Department of Defence and is the Adviser to the Director of Policy within the Iraqi Ministry of Defence, Baghdad. He has also worked in both the United States and Indonesia. His academic fields of study have included History, Strategic Studies, Politics, and International Relations, and is fluent in Bahasa Indonesia.

China's rise leaves West wondering

By Carrie Gracie 2006.08.16
China is overtaking the world's major economies one by one.
It leap-frogged Britain in 2005 and now has Germany and Japan in its sights.

Its growing economic muscle is bringing diplomatic and military strength.

So should the rest of the world be worried?

Robert Kaplan, visiting professor at the United States Naval Academy, said the growth of Chinese power would affect the US, the current superpower.

"For the last 50 years the US Navy has more or less owned the Pacific Ocean as its own private lake," he said. "That is not going to hold for the next 50 years."

Mr Kaplan said the Chinese defence budget has been growing much faster than the economy in general. Spending has been closely targeted at developing missiles and buying submarines, with the specific aim of constraining the US Navy off Chinese waters.

However, Sha Zukang, China's ambassador to the United Nations in Geneva, insisted there was no cause for concern.

If you read China's 5,000-year-long history, he said, "it's not difficult to discover that China basically is a peace-loving nation".

US rival
The Bush administration came to power convinced that China was America's strategic competitor. But then came 9/11. To Beijing's enormous relief, Washington's focus shifted to terrorism, and there was less attention on China's discreet military build-up.

Nevertheless, Pentagon planners are concerned about developments, and US Defence Secretary Donald Rumsfeld has said much of China's arms spending is being concealed.

Ambassador Sha responded strongly to the allegations. "It's better for the US to shut up," he said. "Keep quiet. It's much, much better."

This is a crucial question for China's future. Will it be just an economic superpower content to sell the world shoes and washing machines? Or will it have the military muscle to protect its new interests around the world?

After two centuries of feeling victimised by the West and then Japan, China chafes under a Pax Americana. At present it is keen to protect the economic achievements of the past 30 years and to avoid confrontation with Washington.

However, the issue of Taiwan could still provide a flashpoint. Ambassador Sha said there could be no compromise on this vital national interest. "For China, one inch of territory is more valuable than the life of our people," he said.

Most mainland Chinese I know are equally passionate about Taiwan. Nationalism has replaced Communism as the glue that holds China together.

The other key is prosperity. China is turning a nation of subsistence farmers into a 21st century industrial workforce. That has created an enormous demand for resources and much of China's foreign policy is now focussed on securing supplies, especially of oil and gas.

Global push
In Africa the impact is particularly stark. Garth Shelton of South Africa's Wits University welcomes the attention, saying there is a lot of optimism about the renewed Chinese interest in his continent.

"If we deal with the United States or West European governments they would bring a list of 33 items requiring restructuring of your democracy, your human rights issues," he said. "China would arrive and say we accept you as you are. And that's a refreshing change."

China has invested heavily and offered aid to many African countries, especially those with energy resources. It now is a major consumer of oil from Angola and gets 7% of its oil from Sudan.

There is international criticism that China has blocked UN resolutions criticising the Sudanese government over actions in Darfur, and that it has helped prop up regimes like those of Robert Mugabe in Zimbabwe.

Senegalese journalist Adama Gaye, who has just written the first book by an African about China's new influence on the continent, accuses the Chinese of practicing "cynicism at the highest level".

He questions whether the investment is in Africa's long-term interests. "The moment they no longer need Africa they may disappear overnight and Africa will be left dry under the sun," he said.

Mr Gaye also voiced wider concerns that regimes would be attracted to a "Beijing Model" of economic development without democratic elections.

For Jing Huang of the Brookings Institution in Washington, this is the real threat to the West from China.

"What it really challenges is a value system. Who we are and what we want to be," he said.

However, China's problems remain immense and it needs markets and resources around the globe to sustain its economic growth. We can only hope the enmeshed interests of this century prevent the great wars of the last.

But even without armed conflict, the rise of this first giant of the global era will surely expose the developed world to the culture and values of a billion strangers. A sudden intimacy that may make both rich together, but may also make the West more vulnerable.